Q46PGB_3 - Horngren'S Financial And Managerial Accounting

Question

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of \(550,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

3. If they decide to issue \)3 par common stock and anticipate an initial market price of \(75 per share, how many shares will they need to issue to raise \)3,000,000?

Step-by-Step Solution

Answer

Answer

40,000 shares at $75 per share will be needed to issue to raise $3,000,000.

Step 1: Basic Introduction-

Issue price $3

Anticipated market price of a share $75

Capital to be raised $3,000,000

Step 2: Computation of shares-

$$\begin{gathered} \mathbf{Noofstocktobeissued}\mathbf{=}\frac{\mathbf{Totalamountofcapitaltoberaised}}{\mathbf{Marketpricepershare}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{75}} \\ \mathbf{=}\mathbf{40}\mathbf{,}\mathbf{000}\mathbf{shares} \end{gathered}$$